11-28-07, 12:30 pm

Editor's Note: Art Perlo chairs the economics commission of the Communist Party USA.

PA: Could you briefly describe some of the basic causes of the current housing crisis?

Art Perlo: There are two basic, interrelated causes: sub-prime mortgages and the unprecedented bubble in housing prices. The sub-prime mortgages are what are getting all the headlines. This was a great invention by the financial community, which allowed people to buy houses at prices they couldn’t afford. They did this by setting low introductory monthly payments, and then after a period of time, usually about 2 years, the payments would increase. So somebody might buy a house where the initial monthly payments were $1,200 a month, which they could barely afford, and then after 2 years, the payments would reset overnight to $2,000 a month.

The other cause of the crisis, which is closely connected, was the bubble in housing prices. People not only got stuck with home mortgages they couldn’t afford, but they were for amounts far more than what the house was realistically worth. In the last 10 years, house prices have risen 70 percent faster than inflation, which has created $8 trillion in surplus wealth on paper. What that means is that people paid far more for houses than they were worth. Eventually, over the last year, this hit a wall. All these sub-prime mortgages were resetting, and people could not afford to pay them. As houses were being foreclosed, housing prices had risen so high that people could not afford them. The builders and developers, who had been cashing in on the high housing prices, built like there was no tomorrow, until the number of unsold homes increased from 2 million in 2001 to over 4 million unsold houses today. There got to be so many unsold houses on the market that they just couldn’t keep the prices up. Suddenly people were stuck owing huge mortgages. They might owe $300,000 on a house and if they tried to sell it – if they were able to sell it at all – they could only get maybe $200,000 or $150,000 for it. Now they owe more on the house than the house is worth.

PA: Who are the people that have been most negatively affected by the crisis?

AP: The people who directly are affected, first of all, are at least 2 million families who have lost or will lose their homes, and there could easily be 3 or 4 million before this is over. Then there are the millions more who are working 2 or 3 jobs and sacrificing their healthcare, their kids’ education, even their food, in an effort to hold on to their homes. There are also at least 100,000 workers who have lost jobs in construction, building supplies, and real estate and mortgage finance, and the job cuts are only beginning to roll in. There will probably be millions of jobs lost. Some state and local governments are already facing budget shortfalls because of lower than expected tax revenues. There is also a broader economic downside, but that’s a brief summary of those most directly affected.

PA: How would you evaluate the timing of Bush’s response to the crisis and its content?

AP: My impression, although I have not studied his proposal closely, is that he proposes to make 100,000 or 200,000 homeowners eligible to apply for federally-backed mortgages. This means he is offering to possibly provide some relief to only one-tenth of the homeowners who are affected by this crisis. And the bulk of relief will go to bailing out the lenders who made the bad loans in the first place. The investors will get the full value of the mortgage repaid to them, even though on the market the mortgage is not worth nearly the full amount.

PA: What are some immediate solutions to help people avoid losing their homes?

AP: Nationally, I think we have to recognize that there are millions of homes that were overpriced and that homeowners owe far more than the homes are worth, far more than they can pay back. Literally trillions of dollars in wealth, wealth that has now proved to be imaginary, will have to be written off. This needs to take place in a planned, organized way, and at the expense of the lenders and financial institutions, not the homeowners. That means that mortgages should be marked down to a realistic value the homeowner can afford to pay. For example, if a family has an income of $50,000 a year, they can realistically afford a mortgage of about $180,000, with monthly payments of $1,100. If a mortgage company lent them $350,000 to buy an overpriced home, they are now trying to pay over $2,200 a month. They can’t afford it. The mortgage banker should never have made the loan, so the banker should be the one to live with the consequences.

It is important to organize at the local, community level. This is already being done in some communities around the country, both by community organizations and local governments. The first step is to reach out and find those families who are in danger of losing their homes. There should be public hearings. It needs to be acknowledged that this is a community problem, that these are not just individual disasters that each family has to meet in isolation. It is possible to negotiate with lenders to improve payment terms, but this is most effective if it is done as early as possible and with the backing of an organized group. There is no single formula that is going to work in every community.

In terms of the larger economic picture, the housing crisis appears to be turning into a trigger for a more general financial crisis and probably a recession.

PA: How do you relate this picture of crisis you present to the system of capitalism itself?

AP: The housing crisis and the general economic situation in the country is almost a classic case of what Marx described as a crisis of overproduction. Marx said, The ultimate reason for all real crises remains the poverty and restricted consumption of the masses, as opposed to the drive of capitalist production to develop productive forces as though only the absolute consuming power of society constituted their limit.

This means that, in their drive for profits, capitalists expand production almost without limits. That’s with their right hand. But with their left hand and also in their drive for profits, they do everything they can to keep down the wages and the consuming power of the worker. So they produce more and more, but workers can’t buy what they produce.

An economic crisis has been held off since 2001 by filling in the gap with debt. Working families have gotten deeper and deeper in debt, and now that the housing crisis has hit, people can no longer borrow any more money against the value of their homes. Not only do we have overproduction in housing – I talked about the 4 million unsold houses people are unable to afford – but an estimated $400 to $900 billion a year of purchasing power stands to be lost by consumers, just on the basis that they can no longer borrow against their homes. And so there is a real danger of the economy slipping into a steep and possibly prolonged recession, because people can’t afford to buy what they need.

I don’t have a roadmap for how socialism should work. But socialism is a rational system where the economy is owned and run by working people for their own benefit. The goal is to meet the needs of the people, not first to make profits. How does that apply to housing? If we look at the housing question broadly, it is not only a question of how many houses are built and what they cost, it’s also a question of where they are built and under what conditions. It ties in with all the environmental issues.

A socialist society would look at housing holistically. One, it could avoid bubbles. It would be able to look at the demographics and say, over the next 20 years we are going to need this many new units, and we are going to need to refurbish this many apartments. You’d build housing at a steady rate and employ a steady number of workers, and you would not have huge booms and busts, which disrupt the lives of millions of people. On the other side, you would you say, okay this is where the population is. This is where economic development is planned. This is how we can integrate the need for more housing with environmental concerns and with energy efficiency.

Socialism, as a system, does not always create the right answers, but it creates the possibilities for the right answers, because the people, acting through their elective bodies and their mass organizations, can plan and determine what they need.

--Art Perlo chairs the economics commission of the Communist Party USA. Send your letters to the editor to